Is Saudi Arabia Depending Too Much On The Ghawar Field?

About the only joy Fossil Fuelers have been getting lately is the sweet satisfaction that the ‘Peak Oil’ crowd got it wrong. What the Fossil Fuelers may need to start chewing on is that peak oil, which is merely a description of an inevitability for a limited resource (you heard it here last – fossil fuels are finite) and not a political litmus test, is not their problem; peak demand is their problem. Why else would the owners of the world’s greatest pool of BTUs decide to sell their bounty to the public?

The Saudis have a problem, too. It isn’t just that their economy is slowing down; roughly one third of their 10 mb/d production is used internally, and much of that is used to make cheap power. They burn it as though it were worth $6 per barrel so they can enjoy 3-cent kilowatt-hours. (U.S. average retail is around 12 cents.) You don’t have to win a Nobel Prize to know they would rather sell it at the market, setting a recent low at $45, and use something else to make electricity. That something else might as well be PV power, now available in sunny climates for 3 cents, or less.

The daily cost of burning 3.2 million barrels of $45 oil, at 6, is nearly $125 million. This adds up to a billion in 8 days; soon, you’re talking real money. In the course of a year, it amounts to $45 billion, which is a princely sum. Some Princes are less happy about this than others.

Salman Fishing in the Yesmen

London or New York? $40 oil or 60? $1 trillion market cap or $2 trillion? The game’s afoot and “The Wall Street Journal [reports] that Saudi Aramco’s executives had briefed the Saudi Cabinet on the potential location of the IPO: The company’s leadership wants to go public on the London Stock Exchange, because they see it as the least risky decision. [Newly minted Crown Prince Mohammed] Bin Salman, however, prefers to list the IPO on the New York Stock Exchange.”

In any case, the Journal has called it: The Biggest Fee Event in Wall Street History. “The IPO of the state-owned oil giant could generate as much as $1 billion in fees.” I thought that renewable energy would be Wall Street’s next big inning, but oil still calls out a lively tune. The sound of a trillion dollars could be so sweet that it impairs the judgment of even the most seasoned investment bankers. This doesn’t mean they are wrong, but it may be a reason to ‘discount’ their advice, even if you aren’t looking for a place to launch your own IPO.

Both Goldman and Citi are beating the drum for higher prices. “Goldman’s conclusion is based on the inability of US shale to continue pumping oil at this pace when ‘oil prices are below the marginal cost of production for shale producers. ($50-$55/bl brent).’” Citi’s call seems to be based upon technical analysis: “Oil hits the floor and is now set to soar!” Even if that turns out to be bad timing or bad judgment, it’s decent poetry.

If the trend does not bend, and prices don’t rise, what will it mean for this momentous offering? Do they need $60 oil to get the valuation they want? We are about to find out.

Good to the last drop

Regardless of oil’s price or the valuation of Aramco, potential investors should ask themselves an extremely important question: how sure are you that the mighty Ghawar field, still producing 5 mb/d, equal to nearly all conventional (non-tight oil) U.S. production, is not about to have a stroke and go into decline? Only Aramco insiders know the answer, if anyone. No matter where a well is or when it was first drilled, at some point, it will go into decline, unless you stop using the product. That is as certain as gravity.

Speaking of gravity, the bright light that shines upon Saudi Arabia during most daytime hours is not expected to go into decline for several billion more years. Bet on that. It is reasonable to project that an acre of PV arrays in the Kingdom (be sure to dust them regularly) will provide enough power to push an EV for 2 million miles every year; that is another way of saying 200 EVs for 10,000 miles each. Why do we even bother with gasoline anymore? Mining and turning Lithium into batteries seems more promising unless, of course, those become oversupplied too. Maybe Ghawar will last forever. As Yamani said, we never did run out of stones; we never will.